What is the difference between SIP, SWP and STP?

What is SIP or Systematic Investment Plan?

SIP or Systematic Investment Plan is the investment option offered by Mutual fund company to the investor where small amount on regular basis (usually monthly) is invested in buying units of a mutual fund. You can read more about on our SIP page.

Example: Investor want to accumulate 180,000 over 3 years of time span and expecting high return on it. However, As of now Investor does not have all 180,000 required to purchase mutual funds as a purchase but has capacity to invest 5000 on monthly basis. In this case investor has to choose SIP as option to buy mutual funds on monthly basis and still can accumulate 12* 3*5000 = 180,000.

Wha are advantages of SIP and who should prefer SIP?

  • Investor does not required to have all the money in his pockets on a single day.
  • Mutual fund NAV keeps fluctuating and because investment is done on monthly basis Unit cost is averaged over the 3 years of span which maximizes the expected return.
  • You can cancel SIP at any time. Still keep the accumulated units for longer time or you can withdraw depending on your need. And because units cost is averaged comparative loss is minimal.
  • This is generally suitable for younger generations who can keep it for much longer period of time. Of course it is suitable for other investor too.

What is SWP or Systematic Withdrawal Plan?

In this scheme lump sum purchase of mutual fund units is done on a single day or within a week/month. However, specific amount on regular basis is withdrawn from the investors account. This amount is generated by selling out small number of units from the lump sum purchase. Investor can decide his/her withdrawal amount in SWP plan. As per the amount mentioned by investor specific units are sold.

What are advantages of SWP and who should prefer SWP?

  • SWP plan is beneficial for those who have large lump sum money handy (Such as retirement money, PPF maturity etc) and wants regular income on monthly basis from this investment.
  • It has got some tax benefits.
  • If Investor plans his SWP well then he / she can meet financial goals very easily.
  • This scheme can be easily applied to existing units under specific mutual fund.
  • More suitable for investor with large amount of money.

What is STP or Systematic Transfer Plan?

Systematic Transfer Plan (STP) is a investment option offered where investor can purchase lump sums mutual funds units in a one scheme and can transfer it to another scheme. Yes you are right!!!. You can switch from one scheme to another scheme and transfer fixed or variable amount to other schemes. As investment in mutual funds comes with inherent market volatility and high risk it might happen that one scheme of equity / debt funds are not performing well. Thus, it is beneficial to switch or transfer from one scheme to another which is why STP is preferred.

What are advantages of STP and who should prefer STP?

  • If one scheme is not performing well one can easily switch to other.
  • You can switch scheme from Debt fund to equity fund and vice versa.
  • One can even transfer the amount equal to profit in other scheme doing so you get more mutual funds units of other schemes as well which can balance your investment further.